Lloyds Banking Group PLC and sector rivals face high expectations for first

Just two months after the UK high street banks unveiled their final results for 2020, PLC () will kick off the first-quarter reporting season on Tuesday.

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With the sector having delivered the third-best performance among FTSE 350 shares so far in 2021, the coming week’s banking results should provide a litmus test of whether this return to favour can last – though many of the key issues overhanging the industry are unlikely to be settled until later in the year.

Part of the recent strong performance is likely to be down to the sector’s underperformance last year and before, as well as the strong final quarter 2020, when most of the banks beat consensus profit forecasts, helped by lower losses from bad loan provisioning.

Expectations are high for Q1 of 2021, with analysts at UBS saying trading has been “much better than had been expected, principally driven by market-linked activities”.

Sector analysts at Barclays expect investors to “focus on the impact on revenue of the economic recovery and yield curve steepening” alongside the timing and form of future dividends and other capital distributions.

Investment bank revenues are expected to be strong in the quarter, based on the read-across to US sector peers, which will be notable for the likes of Barclays, NatWest and StanChart that have such sizeable IBs.

The current low interest environment may mean that bank interest income is weak, but the UK mortgage market has been surprisingly strong, which is likely to be good news for the likes of Lloyds.

Loan impairment charges in the quarter are expected to be low, with analysts at Barclays suggesting credit distress “is on ice” given government support schemes and, following the example of US banks, there is “increasing potential for writebacks” of loan loss provisions, especially where there was high provision building last year, as seen at all the UK names.

Big issues for the banking sector, of dividends and the reopening of the economy, with the relaxation of the government’s furlough scheme revealing the exposed underbelly of the economy, are not likely to be covered in great detail in this quarter’s update, said analysts at UBS.

“We expect results to be marked by strength in capital markets income, contracting credit card books and low loan losses, with impairments benefitting from better macro, more government help and a short loss observation period. Capital trends should also be supportive. But we think this is in the mind of the market already,” said UBS analyst Jason Napier.

With the UK re-opening trade “running into the sand somewhat in recent days”, Napier thinks the key catalysts for the UK domestic banks are “further out”, with details around the full relaxation of mobility restrictions perhaps in June and more dividend clarity likely in July and August.

Consensus dividend forecasts for the sector as a whole point to a rebound to £7bn total payout this year after last year’s pause owing to the pandemic and regulatory requirements, with the highest expected dividend yields for 2021 being Barclays at 3.1% and Lloyds at 2.9%, ahead of 2% for NatWest, 1.6% for StanChart ad 1.6% for .

And it will maybe not be until we near the end of the year before the debate really livens up around the ’s interest rates. which would be helpful for bank multiples.

But for the short-term, earnings estimates are moving higher at the Big Five and the first-quarter results will be important in maintaining that momentum, said analyst Russ Mould at AJ Bell.

“Even once the Big Five shake off the pandemic, they still have to grapple with ever-tighter regulation, fintech rivals and the way in which global indebtedness could crimp demand, as well as the prospect of lower-for-longer interest rates weighing on margins. All of these factors explain why the FTSE 100 banks continue to trade below book (or net…